How to reduce and deal with continued large balance of payment surpluses, including speculative inflows?
The current account surplus remains responsible for the majority of the external surplus, while speculative inflows appear to have increased recently. Reducing the current account surplus calls for a set of structural policies to rebalance the pattern of growth towards more services and consumption and less industry and investment. This set of policies includes a stronger exchange rate; a shift in government spending towards health, education and social security; more financial reform; dividend payments for SOEs and stronger corporate governance; better pricing of resources, energy, and land; loosening remaining restrictions on the mobility of labor and capital; and stronger incentives for local governments to rebalance growth. Speculative inflows could be discouraged by tightening controls on capital inflows and policies that effectively change exchange rate expectations. Monetary and exchange rate policy: • A relatively tight monetary policy stance is needed to contain spill over of
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